When Founders Die, Businesses Suffer

As the Pope prepares to step down this week, the Catholic Church is left scrambling to figure out who will succeed Pope Benedict XVI. And, though in this case, it's an unexpected retirement leaving a leadership void to be filled, for many small businesses, it's the death of a business owner than can leave a business in shambles.

In fact, new research finds that many businesses suffer long-lasting and significant negative impacts following the death of their founders.

The study revealed that the death of a founding entrepreneur wipes out on average 60 percent of a firm's sales and cuts jobs by roughly 17 percent. In addition, companies where the entrepreneur dies have 20 percent lower survival rates two years after the death, compared to similar firms where the entrepreneur is still alive.

Sascha Becker, a co-author of the study, said the research shows that founders are the glue that helps hold businesses together.

"We expected businesses that experienced the death of a founder-entrepreneur to have some kind of a dip in performance immediately after the death owing to the upheaval, but we anticipated there would be a bounce-back," said Becker, a professor at the University of Warwick in the U.K. "Even four years after the death, most firms show no sign of recovering and the negative effect on performance appears to continue even further beyond that."

The difference between the great drop in sales compared to smaller decline in employment was puzzling to Becker. While he isn't sure exactly what accounts for it, he believes the difference shows what a vital role these people play in maintaining productivity levels within a firm.

"It could simply be that the founder was a fantastic salesperson who generated a disproportionately high level of sales," Becker said. "On the other hand, it could be down to a leadership effect, where the founder-entrepreneur inspires the employees to perform as best they can and without this presence that drive slips away."

As part of the study, researchers analyzed data on privately owned firms in Norway that had not been opened for longer than 10 years. Specifically, they followed 341 firms where the majority-owning founder had died, and compared them to the same number of companies that shared similar characteristics but where the entrepreneur remained alive.

The results held true regardless of the business type, such as family or non-family firms and urban or rural businesses.

The study did discover that the level of education of the founder did play a role in how badly the firms were affected. Businesses with the most highly educated founders experienced a bigger drop in performance after the death.

While Steve Jobs is an example of a recent prominent entrepreneur death, Becker cautions against applying the study's conclusions to Apple as it is today. Instead, he thinks the results should be applied to Apple's early history in the 1980s when Jobs left the company.

"Apple struggled without him and didn't really regain its momentum until Jobs came back to the helm in the 1990s," Becker said. "During this time Jobs was lost to the firm, creating a similar dynamic to what happens in companies in which the founder-entrepreneur dies."

The study was co-authored by Hans Hvide, a professor the University of Bergen in Norway.

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Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.